The State aid rules
A measure will amount to State aid if it is imputable to the State and financed through State resources; confers an advantage on the recipient; is selective; and distorts or threatens to distort competition and has the potential to affect trade between Member States.
If the Commission finds that the 1991 and 2007 tax rulings amounted to unlawful State aid, it may order recovery by Ireland of the tax that otherwise would have been paid by Apple since 12 June 2003 (ten years before the Commission started its initial investigation) plus interest.
The key issues in Apple’s case
The key question in this instance will be whether the 1991 and 2007 tax rulings granted to Apple gave it a selective advantage because they were based on arrangements which were not established according to the “arm’s length principle”. Intra-group arrangements are “arm’s length” if they do not differ from arrangements that independent companies would have entered into.
Some of the features of the Apple tax rulings which appear to concern the Commission are that the taxable basis in the 1991 ruling was negotiated rather than substantiated by reference to comparable transactions by independent companies; no transfer pricing report was included in the documents provided by the Irish authorities to support the calculation of taxable profits; in agreeing the margins on branch costs in the 1991 ruling, contemporaneous evidence shows that Irish Revenue was motivated by a desire to encourage Apple to maintain high employment levels in the Cork area, which is not a motivation based on arm’s length principles; and the 1991 ruling was applied for 15 years without revision, with no consideration as to possible changes to the economic environment and required remuneration levels.
The Commission’s investigation into the two tax rulings granted to Apple is likely to take some time, and a final decision may be some years away. Although, as mentioned above, Apple is potentially the party with the greatest amount to lose from a negative decision, the investigation will focus primarily on Ireland (as the alleged wrongdoer). Apple will have the right to submit comments on the arrangements and will be a source of information for the Commission, but the Commission is not required to conduct an exchange of views with Apple, nor to give it the same access to evidence as it is to Ireland.
There are indications that the series of investigations of which the Apple investigation forms part may be broadening. In addition to the parallel Commission investigations of transfer pricing rulings issued by the tax authorities of Holland and Luxembourg to Starbucks and Fiat respectively, the Commission announced on 1 October that is has extended the scope of an ongoing investigation into the new Gibraltar corporate tax regime. Having assessed 165 tax rulings granted by the Gibraltar tax authorities to different companies in 2011-13, the Commission will now examine whether the relevant tax rulings practice breaches the State aid rules.
Margrethe Vestager, the Competition Commissioner-designate whose appointment was approved by the European Parliament on 2 October, has stressed the importance of the tax investigations, stating that they “are certainly going to be priorities”.
What should taxpayers do?
Against this background, taxpayers may start to question whether obtaining a ruling is always such a good idea.
Until now taxpayers have tended to see rulings as a one way bet: they appeared to provide absolute certainty as to the future tax treatment of their arrangements with no obvious downside.
In future, taxpayers will need to consider whether seeking a ruling on a precautionary basis might create a hostage to fortune. In such circumstances, one possibility might be to rely on an opinion that their planning can be upheld as a matter of general law, with a view to removing any possible appearance of selectivity (i.e. that they are being granted an unlawful subsidy as a result of administrative concession). Whether or not it is possible to remove such a risk will depend upon whether the underlying tax provisions could be capable of challenge on the basis that they themselves are selective (for example by favouring a class of taxpayers).
Where rulings are sought, taxpayers should seek to ensure that contemporaneous evidence is available to show that the ruling does not give the taxpayer a selective advantage. In an ideal world, taxpayers will wish the authority in question to confirm that the ruling is consistent with the arm’s length principle. At the very least, taxpayers will wish to have some documentary evidence showing that the ruling obtained is not wholly out of line with comparable transactions between independent persons.
Multinationals, funds and other taxpayers that have benefitted in the past from a tax ruling that seems too good to be true – either from the Member States currently under investigation or others – will understandably be concerned and may wish to consider whether any steps can or should be taken to bolster their position in the event of a challenge. In practice, it is unlikely that, in the event that the tax advantage is clawed back, they will have a claim against the government that gave them the unlawful ruling in the first place.
By contrast, taxpayers who have been disadvantaged by the fact that their competitors have obtained overly generous rulings may have a claim for damages against the government that gave those rulings. Competitors of Apple, Starbucks and Fiat will certainly want to follow the Commission’s current investigation with interest.
Moreover, if a ruling can constitute unlawful State aid then so presumably can other administrative decisions in the tax field that confer selective advantages on particular taxpayers. So, for example, governments that have settled litigation with taxpayers on what might be seen as unduly lenient terms (so called “sweetheart deals”) may be vulnerable to challenge from other disadvantaged taxpayers.
Given the sums at stake, this is a story that looks set to run and run.
First published on Accountancy Live on 13 October